Another unwitting source of conflict is your brother or sister’s innocuous request to be a guarantor on a home or personal loan. At first glance, the request may seem harmless, but if you ignore the bank’s requirements, the loan details and the consequences of the move, you can get into a financial quandary. So instead of outright refusing or blindly agreeing to be a guarantor for your brother’s loan, ask yourself these questions:
1. What is your liability?
Your liability depends on the nature of your sponsor: financial or non-financial. While the former has to take full legal liability for loan repayment, similar to a borrower, the latter only acts as a liaison between the bank and the borrower to facilitate communication. Such guarantors are often sought after by non-resident borrowers.
This means that if the borrower defaults or is unable to repay the loan and is unreachable, the bank will only contact the non-financial guarantor to locate the borrower and not the demand repayment of the outstanding loan. A financial guarantor, on the other hand, must pay the entire outstanding loan amount for the borrower. If you are forced to do it for your brother, it probably won’t promote good relations between the two.
2. What is the creditworthiness and financial status of your siblings?
When a bank asks for a guarantor, it’s important that you check your brother’s finances and track record. While each bank has its own policy regarding guarantors, they typically do so when the loan amount exceeds a certain limit or they question the borrower’s ability to repay due to poor credit history, weak credit ratings, or fickle earnings.
So before you agree to help your sibling, find out if he or she is financially healthy, has a good credit score, and can pay off their own loan. If not, be prepared to shell out the outstanding default amount.
3. Does it affect your credit status and creditworthiness?
If you choose to become a financial guarantor, know that it will affect your credit score and credit status just as much as your brother’s. So if your siblings default on credit EMIs or delay payments, that will be reflected in your borrowing, and if you decide to take out a loan of your own at a later date, that can be a problem.
Also, the amount of the loan is determined based on the loan that you are guaranteeing. For example, if you are a guarantor on a Rs 30 lakh loan and wish to take out a Rs 50 lakh home loan according to your income limit, the bank will only waive Rs 20 lakh. Not only will this jeopardize your financial goals, but it will also strain the bonds you have with your siblings.
4. Can you get off halfway?
Understand that the surety bond is a long-term commitment for long-term loans, such as B. A 20-year home loan. There is no way for you to shrug off responsibility unless you can provide the bank with a replacement. A good option is to ensure the sibling gets EMI insurance on a home loan, which provides a guarantee against missed or outstanding EMIs.
It’s also a good idea to get your brother to post secondary security so your liability is reduced in the event of a default. Keep these points in mind to ensure your relationship doesn’t suffer a setback when your brother’s financial situation does.
If you have a fortune, write to us …
We’ve all been in a financial dilemma when it comes to relationships. How do you say no to a friend who wants you to invest in their new business venture? Should you take out a loan from your married brother? Worried about your wife’s impulse buying? If you have such concerns that are difficult to resolve, write to us at [email protected] with the subject “Wealth Whines”.
The advice in this column has not come from a licensed healthcare professional and should not be construed as psychological advice, therapy or medical advice. ET Wealth and the author are not responsible for the outcome of any suggestions made in the column.